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Educational tax credits
Overview of Taxpayer Relief Act of 1997
The Taxpayer Relief Act of 1997 (TRA97) introduced several tax incentives for qualifying student loans. The Hope and Lifetime Learning credits provide the ability to take a tax credit for qualifying educational expense. TRA also provides a deduction for the interest paid on qualifying student loans. The Student Loan Interest Deduction is reported on IRS Form 1098-E. The Hope and Lifetime Learning Credits are reported on IRS Form 1098-T.
The 1098-E Student Loan Interest Deduction and the 1098-T Education Tax Credit forms will be mailed to the student’s permanent address on or before Jan. 31 of each year.
Interest deductions (1098-E)
Borrowers are provided with IRS Form 1098-E to report the amount of interest which may be deductible. This interest may be declared on either IRS Form 1040 or Form 1040A. You are not required to itemize to receive the deduction.
The maximum deduction in one year is $2,500.
There are also limits to your adjusted gross income that may influence the amount of a deduction you may take. The amount of your deduction will be gradually reduced if your modified adjusted gross income is between $55,000 and $70,000 ($110,000 and $140,000 if you file a joint return). You will not be able to take a deduction if your modified adjusted gross income is $70,000 or more ($140,000 or more if you file a joint return).
Hope Scholarship Credit (1098-T)
Taxpayers may be eligible to claim a non-refundable Hope Scholarship Credit against federal income taxes. The Hope Scholarship Credit may be claimed for the qualified tuition and related expenses of each student in the taxpayer’s family (i.e., the taxpayer, the taxpayer’s spouse or an eligible dependent) who is enrolled at least half time in one of the first two years of post-secondary education and who is enrolled in a program leading to a degree, certificate or other recognized educational credential.
The amount that may be claimed as a credit is generally equal to: (1) 100 percent of the first $1,100 of the taxpayer’s out-of-pocket expenses for each student’s qualified tuition and related expenses, plus (2) 50 percent of the next $1,100 of the taxpayer’s out-of-pocket expenses for each student’s qualified tuition and related expenses. Thus, the maximum credit a taxpayer may claim for a taxable year is $1,650 ($3,300 for a Gulf Opportunity (GO) Zone student) multiplied by the number of students in the family who meet the enrollment criteria described above.
The full value of the Hope Scholarship Credit is available to married taxpayers filing jointly with an adjusted gross income (AGI) of $114,000 or less and to single taxpayers with an AGI of $57,000 or less.
Lifetime Learning Credit (1098-T)
Taxpayers may be eligible to claim a non-refundable Lifetime Learning Credit against their federal income taxes. The Lifetime Learning Credit may be claimed for the qualified tuition and related expenses of the students in the taxpayer’s family (i.e., the taxpayer, the taxpayer’s spouse or an eligible dependent) who are enrolled in eligible educational institutions. The credit amount is equal to 20 percent of the taxpayer’s first $10,000 of out-of-pocket qualified tuition and related expenses. Thus, the maximum credit a taxpayer may claim for a taxable year is $2,000 ($4,000 for a Gulf Opportunity (GO) Zone student).
If the taxpayer is claiming a Hope Scholarship Credit for a particular student, none of that student’s expenses for that year may be applied toward the Lifetime Learning Credit. The full value of the Lifetime Learning Credit is available to married taxpayers filing jointly with an adjusted gross income (AGI) of $114,000 or less and to single taxpayers with an AGI of $57,000 or less.
Tuition and fees deduction
You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or a dependent. You cannot claim this deduction if your filing status is “married filing separately” or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education.
What is the tax benefit of the tuition and fees deduction? The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if you cannot take either the Hope or Lifetime Learning Credit because your income is too high.
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